Investors Wary of Another China Cash Crunch

Investors are worried about another cash crunch in China this month following June’s unprecedented crisis, as the end of the quarter and two public holidays approach.

But analysts say Beijing has enough financial resources and the resolve to avoid another credit crisis, though borrowing costs will almost certainly rise over the next two weeks due to banks’ need to meet capital requirements and consumers’ demand for cash to pay for holidays.

Reuters

Although China’s money market interest rates have fallen significantly in the past two months, “investors are still quite concerned about liquidity conditions in late September, with some people even fearing a repeat of the June interbank turmoil,” Bank of America Merrill Lynch said in a research note.

On those investors’ minds are a near-certain growth in demand for cash among consumers ahead of the mid-autumn festival Sept. 18-21 and the weeklong National Day holiday in early October, as well as banks’ need to meet loan-to-deposit ratio requirements as the end of the quarter nears.

There is also the possibility of capital outflows if the U.S. Federal Reserve announces next week that it will begin scaling back its monetary stimulus, and that only a small amount of loans from commercial lenders to the central bank is due to mature this month.

The seven-day repurchase agreement rate, a benchmark of interbank borrowing costs, dropped to 3.49% Wednesday, down from 3.75% at the start of the month. It hit a record 30% in an isolated trade on June 20, and averaged nearly 12% when the cash crunch was at its worst.

The rate is now much closer to the 3.3% it had averaged this year before the credit squeeze started in late May. However, given that it stood as high as 4.7% in late September a year ago, when monetary conditions in China were relatively loose, it is likely to rise above 4% later this month, traders say.

“Funding conditions will definitely become tighter toward the end of this month but there won’t be another credit crunch,” said Chen Long, an analyst at Bank of Dongguan.

The Chinese central bank has also improved its liquidity-management skills since June’s cash crunch, Mr. Chen said. “Investors have also become much better prepared for such seasonal volatility in liquidity conditions,” he said.

The People’s Bank of China allowed interbank lending rates to spike in June in the hope of reining in aggressive and reckless financing by banks. That left some small- and medium-size banks caught short of cash to repay investors in wealth-management products, which have exploded in popularity recent years as investors sought higher yields.

However, amid recent turmoil in some emerging markets and in light of a major Communist Party policy-setting meeting set for November, “China’s new leadership cannot afford to be hit by another unnecessary interbank liquidity squeeze,” Bank of America Merrill Lynch said.

“We should keep in mind that China’s central bank has a deep pocket to provide enough RMB liquidity if necessary,” the U.S. bank said, referring to the renminbi, the official name of China’s currency.
Since the turmoil in June, Chinese banks have also improved their own liquidity management and are much better equipped to deal with a possible crisis, it added.